What is a basic salary?
Basic salary or basic pay is the money a person earns before additions or deductions are made by their employer. In addition to the term ‘basic salary’, it is helpful to understand the difference between base salary, gross salary, and net salary.
This is the initial figure an employee earns at the very start of their employment with a company.
This refers to the additions to the basic annual salary. These can include some financial benefits like :
- Allowances: This may involve an employer contribution towards a work phone or internet at home.
- Bonuses: Such as for reaching targets or objectives.
- Reimbursement: To cover travel expenses and work away from home.
- Commissions: Particularly in the sales industry, commissions can be earned and added to the basic salary.
- Overtime: With reference to hourly pay especially, there can be a legal requirement to provide overtime if an employee has worked for a set number of hours in a week.
Also referred to as take-home pay, unlike overtime pay, this is where all additions and deductions have taken place. Some deductions include:
- Trade Union membership
- Income tax
- Pension allowance
- Health and life insurance.
How is basic salary calculated and paid?
Basic salary is calculated differently from company to company. However, from a wider perspective, there are numerous factors which contribute towards the make-up of a basic salary. Some of these include:
Some companies will pay a higher basic salary than others to attract high-caliber employees.
Basic pay can differ between countries and regions. For example, employees based in a city will often be paid more than if they were based in an area with lower living costs.
- Education and skill set:
People with considerable qualifications and experience will be able to command a higher basic salary rate or annual pay raises than those with fewer qualifications or skills.
- Minimum wage:
Companies must pay employees above a certain amount by law (minimum wages), as mentioned in the Fair Labor Standards Act (FLSA).
- Trade Unions:
The leadership of employment unions negotiates on behalf of their member's wage rates and increases.
The basic salary is paid in line with what has been agreed in the employee’s employment contract. It will be paid weekly, monthly, or bimonthly. Every salaried employee gets a payslip that includes a breakdown of their salary range.
What is the difference between basic salary and hourly pay?
Employees on basic pay usually receive a set amount of pay regardless of how many hours they work. In contrast, people on hourly rates get paid for overtime.
Pros for basic pay:
- A regular stable salary
- Salaried employees get sick pay and holiday pay
- Employee benefits such as childcare allowances and health insurance.
Cons for basic pay:
- Limited overtime opportunities
- No room for additional part-time employment.
Pros for hourly pay:
- Pay increases for working on statutory holidays
- More likely to have overtime availability.
Cons for hourly pay:
- Lack of employee benefits
- Hours may be cut due to a lack of demand.
What is the difference between basic salary and annual pay?
The calculation of base pay is different from annual pay. As mentioned above, base salary is what an employee earns per hour, whereas annual pay includes base pay plus bonuses, commissions, and other forms of compensation.
Annual pay includes base pay plus all other forms of compensation, such as bonuses, commissions, and tips. For salaried employees, yearly pay is usually calculated by multiplying the employee's hourly rate by the number of hours they work in a year. Bonuses and commissions are typically paid out once per year.
Pros of annual pay:
- Potential to earn a higher income
- Opportunities to earn additional income through bonuses and commissions.
Cons of annual pay:
- Unpredictable income
- Income may fluctuate from year to year.
Can basic salary change?
Basic salaries can go up and down. An increase in basic pay could be due to a promotion which leads to a pay rise, improved skills, experience, or qualification due to training, or a company-wide pay increase to reflect the cost of living increases or to improve employee retention.
Occasionally, basic pay may decrease. This might be because an employee is demoted or in difficult economic times because the employer needs to reduce wages to ensure the business's survival. Alternatively, an employee may take a pay cut in order to keep their job during tough economic conditions.
What are the benefits of a basic salary structure?
A good annual basic salary structure will ensure that employees are fairly and consistently paid for their work. It will help to motivate employees and encourage loyalty to the company.
It can also help to attract and retain the best talent. It is a key element of any employee benefits package and can help make a company an attractive workplace.
Basic pay can also act as a safety net for employees. It provides financial security and peace of mind, which can be especially important in times of economic uncertainty.
What are some common problems with basic salary?
The most common problem with basic pay is that it is not always fair and equitable. Basic pay can be determined by a number of factors, such as skills, experience, qualifications, and location. This can lead to disparities between employees who are doing the same job but are being paid different rates.
Another problem with basic pay is that it can be inflexible. In some cases, employees may be stuck in low-paying jobs because their salary is not enough to cover living costs which can lead to financial difficulties and stress.
Basic pay can also be a problem for employers. If salaries are too low, it can lead to high staff turnover and difficulty retaining employees. If salaries are too high, it can lead to financial difficulties for the company.
Another common problem with basic pay is that it can be inflexible. Basic salaries are usually paid in line with what has been agreed in the employee’s employment contract. It will be paid weekly, monthly, or bimonthly. This can make it difficult for employees to manage their finances if their hours or working patterns change.
What are some tips for managing a basic salary?
Here are some tips for managing basic pay:
- Basic pay should be fair and equitable: All employees should be paid the same rate for doing the same job.
- Basic pay should be reviewed on a regular basis: This will ensure that employees are being paid in line with their skills, experience, and qualifications.
- Basic pay should be flexible: Employers should consider offering salary sacrifice schemes or variable pay. This will help to retain employees and keep them motivated.
- Basic pay should be affordable: Employers should make sure that they can afford to pay their employees a fair wage.
- Basic pay should be reviewed in line with the cost of living: This will ensure that employees can maintain their standard of living.
- Basic pay should be reviewed in line with changes in the labor market: This will ensure that employees are paid a fair wage in line with other companies.